diff --git a/CHANGES.md b/CHANGES.md
index cee783ed..eca31d7d 100644
--- a/CHANGES.md
+++ b/CHANGES.md
@@ -26,6 +26,7 @@
 - [pull #737] Fix XSS from code spans that the span gamut doesn't treat as code spans in safe mode (#726)
 - [pull #743] Add a `strip-syntax` option to the `header-ids` extra that leaves link URLs, image paths, inline HTML tags and emphasis markers out of header ids (#192)
 - [pull #747] Fix `link-patterns` extra linking text inside Markdown links and images whose label wraps onto another line
+- [pull #754] Fix `toc` extra generating invalid HTML when a header is higher than the first one, and nesting headers under the wrong parent after a skipped level
 
 
 ## python-markdown2 2.5.5
diff --git a/lib/markdown2.py b/lib/markdown2.py
index 3632a54e..75e25822 100755
--- a/lib/markdown2.py
+++ b/lib/markdown2.py
@@ -4639,11 +4639,18 @@ def indent():
         elif level == h_stack[-1]:
             lines[-1] += "</li>"
         else:
-            while level < h_stack[-1]:
+            # Close nested lists until we're back in the one this header
+            # belongs in. The outermost list is never closed, so a header
+            # above the first one's level (eg: an h1 after an opening h2)
+            # stays at the top level.
+            while len(h_stack) > 2 and level <= h_stack[-2]:
                 h_stack.pop()
                 if not lines[-1].endswith("</li>"):
                     lines[-1] += "</li>"
                 lines.append("%s</ul></li>" % indent())
+            if not lines[-1].endswith("</li>"):
+                lines[-1] += "</li>"
+            h_stack[-1] = level
         lines.append('{}<li><a href="#{}">{}</a>'.format(
             indent(), id, name))
     while len(h_stack) > 1:
diff --git a/test/tm-cases/toc_shallower_headers.html b/test/tm-cases/toc_shallower_headers.html
new file mode 100644
index 00000000..ce1eb311
--- /dev/null
+++ b/test/tm-cases/toc_shallower_headers.html
@@ -0,0 +1,15 @@
+<h2 id="overview">Overview</h2>
+
+<h1 id="getting-started">Getting Started</h1>
+
+<h2 id="install">Install</h2>
+
+<h3 id="notes">Notes</h3>
+
+<h1 id="api">API</h1>
+
+<h3 id="functions">Functions</h3>
+
+<h2 id="classes">Classes</h2>
+
+<h2 id="errors">Errors</h2>
diff --git a/test/tm-cases/toc_shallower_headers.opts b/test/tm-cases/toc_shallower_headers.opts
new file mode 100644
index 00000000..ac671854
--- /dev/null
+++ b/test/tm-cases/toc_shallower_headers.opts
@@ -0,0 +1 @@
+{"extras": ["toc"]}
diff --git a/test/tm-cases/toc_shallower_headers.tags b/test/tm-cases/toc_shallower_headers.tags
new file mode 100644
index 00000000..2b2472e0
--- /dev/null
+++ b/test/tm-cases/toc_shallower_headers.tags
@@ -0,0 +1 @@
+toc extra
diff --git a/test/tm-cases/toc_shallower_headers.text b/test/tm-cases/toc_shallower_headers.text
new file mode 100644
index 00000000..8017b2b3
--- /dev/null
+++ b/test/tm-cases/toc_shallower_headers.text
@@ -0,0 +1,15 @@
+## Overview
+
+# Getting Started
+
+## Install
+
+### Notes
+
+# API
+
+### Functions
+
+## Classes
+
+## Errors
diff --git a/test/tm-cases/toc_shallower_headers.toc_html b/test/tm-cases/toc_shallower_headers.toc_html
new file mode 100644
index 00000000..9883cc71
--- /dev/null
+++ b/test/tm-cases/toc_shallower_headers.toc_html
@@ -0,0 +1,16 @@
+<ul>
+  <li><a href="#overview">Overview</a></li>
+  <li><a href="#getting-started">Getting Started</a>
+  <ul>
+    <li><a href="#install">Install</a>
+    <ul>
+      <li><a href="#notes">Notes</a></li>
+    </ul></li>
+  </ul></li>
+  <li><a href="#api">API</a>
+  <ul>
+    <li><a href="#functions">Functions</a></li>
+    <li><a href="#classes">Classes</a></li>
+    <li><a href="#errors">Errors</a></li>
+  </ul></li>
+</ul>